A PURPA Roadmap for Microgrids

This Article explores the ways in which Sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (“PURPA”),[1] might be useful in accelerating the development of multi-participant microgrids. PURPA provides a framework for the regulation of certain electric generation facilities known as qualifying facilities (“QFs”).[2] Securing QF status would help remove some of the legal uncertainties and regulatory burdens that may impede the development, construction, financing, and operations of those microgrids that meet the criteria to be deemed QFs. Specifically, securing QF status would provide a legal framework that defines their rights and obligations. The analysis concludes that a small segment of microgrids could be eligible for certification as QFs under PURPA within existing regulations and precedent, although certification of a multi-user microgrid as a QF would include some novel elements. Importantly, however, the criteria that must be met to obtain and maintain QF status would limit the potential for most microgrids to utilize PURPA in this way. Nevertheless, PURPA’s regulatory structure includes useful and important ideas for policy makers to consider when developing new frameworks tailored appropriately to microgrids.

Introduction

Microgrids have become a hot topic in the electric industry due to their potential to improve the efficiency of energy use, reduce emissions, enhance reliability, and facilitate resiliency. Yet, relatively few microgrids have been developed to serve multiple consumers beyond the owner. The causes for this lag in development include legal uncertainty, and legal and regulatory costs and burdens.

A microgrid is generally defined by three essential components: (1) electric generation, (2) load,[3] and (3) the wires and associated equipment connecting the two. A microgrid may also have storage capability or be combined with a system that produces and distributes steam or heat, such as a district heating system. The term “microgrid” is commonly applied when the above-described structure has the capability to run in an “island” mode—disconnected from the macrogrid[4] —although, in its normal mode of operation, it may be connected, synchronized, and operated in parallel with the macrogrid.[5] Modern systems include a sophisticated control system, allowing the microgrid to optimize its operation and balance energy production and load that are within its boundaries. These localized networks could be used, for example, to integrate small scale renewable energy sources and improve system efficiencies, provide a higher degree of reliability to government services and businesses whose operations must be able to withstand grid outages, or to help restore electric service after a service disruption. Advanced microgrids operate in parallel with the macrogrid and can play an integral and important role in the macrogrid’s operation, for example by providing ancillary service or operational flexibility to optimize grid operations.

Microgrids that serve a single entity on its own property, such as a university, industrial site, or military base, are quite common and have existed for decades. But technological evolution, resiliency concerns, and other factors are now increasing the interest in multi-participant grids, for example, microgrids that serve consumers who had no prior relationship to the owner of the generation or wires, and ones in which the owner of the wires integrates and delivers power from one or more generators with different owners.

One of the challenges for a private, non-utility entity seeking to develop a microgrid that serves other, previously unrelated, parties is legal uncertainty. Many states have no definition of a microgrid, or clarity as to whether or not the microgrid owner is, or should be regulated as, a public utility. Distribution has long been viewed as a “natural monopoly” that should be regulated for the purposes of protecting consumers and assuring the financial health of the utility. Distribution utilities usually are granted an exclusive franchise area and required to serve anyone that requires power. A microgrid serves only a selected group of consumers and can be viewed as a competitor to the distribution utility. However, it exists in the space between the distribution utility and that select group of consumers. Thus, the microgrid functions as both a customer of the distribution utility and a direct provider of distribution services to its consumers. It is dissimilar to a competitive supplier of retail electricity (such as the entities sometimes called “electric generation suppliers” (Pennsylvania) or energy service companies) because a microgrid physically delivers power (or other products, such as steam) as well as supplies some or all of the products that it delivers. Its unique role raises questions that will take time for state legislatures and regulators to consider.

Even as those deliberations are beginning, however, innovators are identifying potential opportunities for multi-participant microgrid applications and seeking to move forward. As long as the microgrid’s offtakers’ participation is voluntary, some obstacles can be addressed through contractual arrangements in which the parties determine the allocation of rights and obligations among themselves. But, uncertainty as to the rights and obligations of the microgrid owner and operator under law still can impair planning, financing, and budgeting for the development and operation of a microgrid. In particular, the microgrid developer may face specific legal obstacles in the form of restrictions on the common ownership of generation and distribution (in retail access states that have mandated unbundling); franchise laws; prohibitions on retail sales by non-utilities (in states without retail access); regulation of its rates, organization, and financing under state or federal law in the same manner as a public utility; its rights to receive non-discriminatory back-up service from the macrogrid; and constraints on its ability to market generation excess to the needs of the microgrid’s offtakers.

One possible way for the prospective microgrid owner to navigate through these uncertain shoals is to fit within an existing class of market participant, which already has defined rights and obligations. This Article explores whether and how a microgrid might be considered a qualifying facility (“QF”), as defined pursuant to the Public Utility Regulatory Policies Act of 1978 (“PURPA”), in order to secure the certainty of the well-established set of rights and obligations enjoyed by a QF.

As discussed below, it is conceptually possible for certain microgrids to meet the criteria necessary to be a QF. But whether or not this is a sensible path will depend entirely on whether the restrictions that would arise from QF status would be compatible with the intended function of the microgrid, and the usefulness of QF status for the types of hurdles the microgrid owner seeks to overcome. Thus, identifying the benefits that a particular microgrid might gain from QF status, weighing those benefits against the costs and restrictions inherent in QF status, and comparing that set of costs and benefits against the alternatives, is an important part of any microgrid owner’s deliberation as to whether QF status would be feasible, beneficial, and worth pursuing. Even in cases in which QF status is not feasible or sensible, regulators and others may find the PURPA framework a useful touchstone when considering an appropriate new regulatory structure specifically tailored for microgrids.

To be or not to be … a QF

A QF is entitled to certain benefits and regulatory exemptions, which make it easier to become established and to operate. Those benefits include:

exemption from state utility-type regulation of its rates, finances, and organization[6] (PURPA does not exempt a QF from state law prohibitions on making retail sales, if such prohibitions or any other applicable laws, such as zoning or environmental compliance, exist);[7]

exemption from regulation under the Public Utility Holding Company Act;[8]

if the QF is 20 MWs or less, the QF owner may sell its output at wholesale without having to secure market-based rate authority or file rate schedules with FERC;[10]

in some parts of the country and depending on the QF’s size and configuration, the owner of the QF may also have a federal right to sell its power to the interconnected electric utility at the utility’s “avoided cost” rate–that is, the cost of the utility’s incremental cost of alternative generation;[11] (although whether the QF would take advantage of that right is dependent on alternatives, such as a right to net meter or the benefits of participating directly in a market), or, if the QF agrees, to have the interconnected utility transmit its power to another utility for purchase;[12] and

under certain conditions, both the electricity producing and electricity consuming portions of the facility may be entitled to “the benefits attached to QF status,” as a matter of federal law, particularly a non-discriminatory right to receive supplementary, back-up, maintenance, and interruptible power, even if the retail consumer is under separate ownership from the generator.[13]

Additionally, state law regulations applicable to QFs promulgated pursuant to PURPA may reinforce these rights or provide additional advantages. For example, Pennsylvania Code § 57.35(a)[14] requires supplementary power to be provided to QFs at rates that “recover the same costs that the utility is permitted to recover from another utility customer of the same customer class and with the same usage characteristics.”[15] Thus, the PURPA right to non-discriminatory supplementary power is given more shape by state law.

Rights granted under federal law might also work in combination with state law rights to offer a potential QF/microgrid (and in some cases, other types of alternative energy facilities) options otherwise not available. For example, Iowa exempts from the definition of “public utility:” “a person furnishing electricity to five or fewer customers either by secondary line or from an alternate energy production facility or small hydro facility, from electricity that is primarily for the person’s own use.”[16] Under Iowa law, an “alternate energy production facility” is defined to generally include renewable and waste-fired generators–some of which may also be QFs–and their associated transmission and distribution lines.[17] So, under Iowa law, it would be conceivable that the owner of generation intended primarily for the owner’s own use and its associated transmission and distribution–whether a QF or not–might be able serve tenants or adjacent property owners, and benefit from state law exclusions. [18] When state law exemptions are combined with the exemptions and benefits accorded to QFs under federal law, the burdens of microgrid ownership may be further lightened.

Regardless of whether it is connected to a microgrid or not, any generator that is a QF would be entitled to PURPA benefits and state law rights granted to QFs. However, the purpose of a microgrid is to integrate all of the generation and load that is on the microgrid–that is, behind the interconnection point of the microgrid and macrogrid. As a result, the output of any single generator will intermingle with that of the other generators before reaching the macrogrid, which could blur a qualifying generator’s rights to claim certain QF benefits. This could also limit the rights of the QF’s interconnected loads (i.e., the offtakers of the QF’s electrical output) to assert their PURPA right to non-discriminatory access to supplementary, back-up, maintenance, and interruptible power. But if the entire microgrid were able to claim QF status, then all the connected generators and offtakers would be able to transact under the PURPA framework.[19]

Analysis

The Federal Energy Regulatory Commission (“FERC”), which has the exclusive authority to determine whether or not an entity is a QF, has not yet issued an order explicitly finding a self-identified microgrid to be a QF.[20] Arguably, however, many of the existing QFs are microgrids, and additional and more complex configurations typical of the types of microgrids being developed today could potentially qualify.

Determining whether a microgrid is a QF requires consideration of each of the microgrid’s components–production, consumption, the connecting equipment and wires and, if applicable, storage capability–to determine if, as a whole, the microgrid constitutes a QF. It is also important to assess the conditions under which the retail consumer of the electricity generated is also entitled to receive supplementary, back-up, maintenance, and interruptible power on a non-discriminatory basis.[21] And lastly, as discussed below, the organizational structure of the microgrid could be important when determining whether the microgrid can be certified and operated as a QF.

Generation

The foundational inquiry must be whether the generation components of the microgrid can each meet the requirements for QF status. Both cogeneration facilities[22] and small power production facilities can be QFs, if they meet the criteria for fuel use and operations set forth by FERC.

A qualifying small power production facility is one that uses renewable or waste fuels for 75% or more of its energy input and meets certain size limitations.[23] Although up to, but not including, 25% of its energy input may come from fossil fuels, those fuels may be used only for ignition, start-up, testing, flame stabilization or control uses (for example, in a waste-fired unit), and the minimum amounts needed to alleviate or prevent unanticipated equipment outages and emergencies.[24] Thus, wind and solar facilities of less than 80 MWs (which generally use no fossil fuels) would easily qualify, but certain facilities that burn waste fuels, for example, municipal solid waste, bio-digester gas, or landfill gas, could also provide QF generation for the microgrid, if within the size and fuel use criteria.

A qualifying cogeneration facility produces at least two forms of energy: electricity and thermal energy, and, may also produce, mechanical energy. To meet the qualification criteria, the electrical and thermal energy produced by a cogeneration facility must be produced through a sequential process and the thermal energy must be applied to a useful purpose such as heating, cooling, or industrial or commercial processes.[25] The initial operating and efficiency standards promulgated by FERC enabled facilities to gain QF status by dedicating less than half of their thermal output to a useful purpose, which increased their capacity for selling power to the grid. While those standards remain in place as a threshold for qualification, a new cogeneration QF of more than 5 MW is not entitled to sell its excess electric generation at the utility’s avoided cost unless it can show that the thermal energy produced is “used in a productive and beneficial manner” and the “electrical, thermal, chemical and mechanical output … is used fundamentally for industrial, commercial, residential or institutional purposes.”[26] Thus, one of the primary benefits of QF status, avoided cost pricing, is reserved to QFs which meet this more stringent threshold. Yet, presuming that the microgrid is intended primarily to serve its interconnected load, even the more stringent condition needed to qualify for avoided cost sales is potentially within reach (although other sales may be intended, and perhaps even more lucrative, particularly if the microgrid can elicit value for attributes such as reliability or sustainability).

A microgrid may find it optimal to incorporate two or more sources of generation, such as a gas-fired cogeneration facility and multiple rooftop solar installations, which raises some issues with respect to gaining QF status. FERC’s regulations were not written with the expectation that a single application for, or certification of, QF status would include a combination of one or more small power production and cogeneration facilities. An application to FERC for certification of a QF that has multiple fuel sources and technologies would not fit neatly into the form for claiming certification (Form 556). Although precedents may exist among the thousands of QFs that have claimed QF status in the past thirty years, finding an example remains elusive. So, there exist both practical and precedential barriers that must be overcome.

However, equally important, FERC’s rules do not explicitly bar certification of a multi-generator, multi-fuel QF either. Many QFs whose status has been certified by FERC have complex configurations, including facilities using multiple types of the same technology or multiple types of equipment using the same or similar fuels at the same site. Examples include multiple wind turbines at a single site constituting a single qualifying wind farm[27] or multiple boilers, turbine-generators and other equipment working in tandem with common facilities for the extraction and use of the thermal output as a qualifying cogeneration facility.[28] FERC has certified facilities that have the ability to switch fuels (such as cogeneration technologies that can be fueled with either oil or gas), and facilities that use more than one fuel.[29] It has even certified a single facility as both a qualifying small power production facility and a qualifying cogeneration facility,[30] and it permitted three geothermal QFs to re-certify as a single QF (approved under delegated authority).[31] Practically speaking, FERC would most likely require that each generation facility on the microgrid demonstrate its qualification for QF status independently of the others, as well as in combination, and pre-filing discussions with FERC staff with respect to process as well as substance would be helpful. Further, whether provided through individual cases as they are filed, or through a policy statement, clarification by the FERC would help inject certainty into market development.

Storage

An energy storage system, such as a battery, can be a qualifying small power production facility.[32] The PURPA Conference report affirms that Congress intended to include storage within the scope of PURPA:

The definition of small power production facility includes solar electric systems, wind electric systems . . . and electric energy storage facilities.[33]

However, to qualify, it must meet the fuel use limitations set forth in the Commission’s regulations for a qualifying small power production facility.[34] Specifically, 75% of the energy input must be from biomass, waste, renewable resources, geothermal resources, or any combination thereof.[35] Additionally, the use of oil, natural gas, or coal is limited to only the minimum amount needed for “ignition, startup, testing, flame stabilization, and control uses” and may not exceed 25% of the fuel input to the facility annually.[36] Thus, if a storage system is integrated into the microgrid in a manner that assures it is charged solely from the other renewable and waste-fired QF facilities connected to the microgrid, and not from power flowing into the microgrid system from the macrogrid or fossil-fueled generators with which it is connected, it too can be a QF. (The author does not opine on the technical feasibility of this configuration.)

Consumption

The highly reliable electric system in the United States grew by connecting multiple small systems into today’s multi-state interconnections and organized markets. These regional interconnections expanded the opportunities for economic exchanges of power and enhanced each smaller system’s reliability, while limiting the amount of redundancy (or reserves) needed on each small system. So too, while a sophisticated microgrid can provide many benefits, its economics and reliability can be enhanced if it remains connected to the macrogrid and can enter into beneficial transactions with entities outside of the microgrid. However, incumbent utilities or other incumbent market participants may view formation of a microgrid by a new market entrant adversely. Therefore, unless compelled by law, incumbents might be unwilling to transact with microgrid owners. Thus, regulations facilitating cooperation can help improve the value microgrids bring to the grid.

In anticipation that a QF might meet opposition from incumbents (both with respect to the QF’s own needs for power and the needs of any load it serves), PURPA required the FERC to promulgate “such rules as it determines necessary and appropriate to encourage cogeneration and small power production.”[37] The rules it promulgated, among other things, “require electric utilities to offer to – (1) sell electric energy to qualifying cogeneration facilities and qualifying small power production facilities.”[38] Such rules must provide for such sales to be made on a non-discriminatory basis.[39] In promulgating such rules, FERC determined that electric utilities “shall sell to any qualifying facility…energy and capacity” and sell “[u]pon request of a qualifying facility…(i) Supplementary power; (ii) Back-up power; (iii) Maintenance power; and (iv) Interruptible power.”[40]

When operating, a QF, like any other power producer, would typically satisfy its own needs for power before exporting power to the grid. Indeed, FERC specifically limits the availability of avoided cost pricing to the net generation of a QF. However, when not operating, the QF might need maintenance power or back-up power. But the fact that Congress included a right to supplementary power and interruptible power on a non-discriminatory basis necessarily implies the existence of an electrical load—that is, an electrical offtaker of the QF—whose needs might not be fully met by the QF at all times.[41] The question of which offtakers and which loads are entitled to this type of non-discriminatory service is not fully fleshed out in PURPA or its implementing regulations and therefore has been developed through administrative case law.

The seminal case in this regard is Alcon (Puerto Rico), Inc.[42] In Alcon, FERC determined, and the Court of Appeals for the District of Columbia affirmed, that the entity consuming the thermal output of a qualifying cogeneration facility, even if it is under different ownership than the generating portion of that facility, is entitled to receive supplementary, back-up, maintenance, and interruptible power on a non-discriminatory basis.[43] In Alcon, the heat, steam and electricity producing components of the facility were owned by O’Brien Energy Products, Inc., but the steam and electrical output were consumed by its host, Alcon (Puerto Rico), Inc.[44] Because Alcon’s consumption was essential to realizing the value of co-generating electricity and thermal energy, FERC reasoned that the equipment that consumed electricity and thermal energy was an integral part of the QF, notwithstanding the diversity in ownership.[45] FERC found that diverse ownership might occur for legitimate financing and tax reasons, and under those circumstances, denial of the benefits of QF status—particularly the right to supplementary, back-up, or interruptible power to serve the load usually served by the QF—“could have an unintended negative effect on the development of cogeneration projects by limiting third-party financing options for such projects.”[46] Thus, different ownership of the generation-producing and thermal-consuming equipment of a single cogeneration facility is permissible and both portions of the QF are entitled to non-discriminatory service.

Applying the QF label to a broader sector of microgrids, particularly those involving diversity of ownership across the various parts of the microgrid and offtakers who consume only the electrical output, is where QF status for a microgrid becomes more difficult to support. In Union Carbide Corporation, FERC was required to decide whether the electrical-only offtaker of a cogeneration facility which was owned by a joint venture—formed by the electrical-only offtaker and the offtaker of thermal and electrical output—was entitled to receive supplementary, back-up, maintenance, and interruptible power. [47] The partners in the joint venture had a longstanding customer-supplier relationship, independent of their co-generation joint venture, and the power was transmitted only 1.7 miles via a private line.[48] FERC determined the electrical offtaker was entitled to receive PURPA benefits, after analyzing the novel question with a four-part test (which it subsequently summarized):

(1) whether the power producing and consuming components are commonly owned or operated; (2) whether the power producing and consuming components are in close proximity; (3) whether the power line used to link the power producing and consuming components is a private line that is part of an integrated industrial operation; and (4) whether there is a customer/supplier relationship.[49]

This four-part test allowed the joint venture partners to proceed in sharing the benefits of the QF, but it was narrowly crafted. FERC’s decision to craft such a narrow test suggests that the rights of consumers receiving power from a cogeneration facility under circumstances that do not meet the Union Carbide test requirements may be limited. Further, the FERC cases do not clarify whether the consumer of the power generated by a small power production facility, particularly if it is not also the owner, is appropriately entitled to any QF benefits.

The Commission’s underlying reasoning in the Alcon case supports the argument that all consumers of any QF’s power should be entitled to supplementary, back-up, maintenance and interruptible power. In that case, FERC reasoned that consumption was an integral part of the QF’s function and diversity of ownership offered financing flexibility.[50] So, too, in the case of a small power production facility supplying power at retail, having a retail consumer can facilitate financing, particularly if the offtaker is willing to contract on terms more favorable than the interconnecting utility. Indeed, on those utility systems where a QF no longer has the right to require a utility to purchase its power at an avoided cost price, such an offtaker may be essential to the QF’s ability to secure financing. Thus, limiting the right of the electrical offtaker of a small power production facility to receive the same benefits as Alcon’s offtaker could also present an obstacle to financing.

However, the view that any offtaker should be entitled to back-up generation did not prevail in Union Carbide.[51] Instead, the Commission drew a distinction between an entity that consumes both the QF’s thermal and electrical output and one that takes only electricity.[52] While the decision ultimately extended the right to back-up generation to the electric-only offtaker, it did so on limited grounds, namely, to those who could meet the four-part test. Thus, for a microgrid owner seeking to secure the right to demand non-discriminatory access to supplementary, back-up, maintenance, and interruptible power for the interconnected electrical loads, the easiest route would appear to be through a microgrid that includes a cogeneration facility and provides thermal and electrical output to the interconnected consumers. Such consumers would fit squarely within Alcon. For consumers of the electrical output who do not have thermal loads, the four requirements of the Union Carbide test would either have to be applied or the case would have to be distinguished. Application of the Union Carbide test in a non-industrial context might be difficult, since the test was designed based on relationships and uses that arise in industrial contexts. For example, the scope of the customer-supplier relationships that the FERC would find acceptable in a different context, such as one where the customer is a homeowner and the supplier is a microgrid, is uncertain. What other relationships would the homeowner and microgrid owner have to engage in, in order to fit the Union Carbide test?

Even if the electric power consumers are also thermal consumers, there might still be a question raised if the microgrid is served by multiple generators, some that provide thermal energy and some that do not., such as a cogeneration facility and solar arrays. However, if all the power is QF power (except for the supplementary, back-up, maintenance, and interruptible power) and the consumers, generators and owners are tied together through an acceptable additional relationship (e.g., sharing in the thermal output, otherwise operating as an economic unit or sharing other resources, perhaps in a landlord-tenant situation), then the argument for denying or limiting consumer access to supplementary, back-up, maintenance, and interruptible power would be relatively weak.

Circuits and other transmission and distribution equipment

Another pertinent question is whether the microgrid is disqualified from QF status because it includes the circuits, transformers, control equipment, and related electrical equipment that connect the generation, storage, and consumers to each other and connect the microgrid to the macrogrid. While on one hand it seems obvious that any QF needs some such equipment, and therefore it must be implicitly included, early in the history of QFs questions were raised regarding whether the lines themselves were part of the QF or not. Subsequently, FERC has explicitly held, and incorporated into its regulations its determination, that the owner of the generation facility may also own and consider part of the QF transmission lines and other equipment used for interconnection purposes (including transformers and switchyard equipment), if:

(A) Such lines and equipment are used to supply power output to directly and indirectly interconnected electric utilities, and to end users, including thermal hosts, in accordance with state law; or

(C) If such lines and equipment are used to transmit power from other qualifying facilities or to transmit standby, maintenance, supplementary and backup power to other qualifying facilities.[53]

Importantly, the lines behind the meter that connect the generating and consuming elements of the QF, move power between and among different QFs, and deliver supplementary, maintenance, back-up and interruptible power to the QF and its thermal host, are among the elements that may be part of the QF. Thus, the regulatory language provides a basis upon which the entire microgrid could be found to be a QF.

Further, under clause (A), lines interconnecting the QF to end-users for the delivery of the QF’s power can be part of the QF, whether or not such end-users are part of the microgrid. But, implicitly, lines used to transmit non-QF power from the macrogrid to end-users who are not also thermal hosts are not included with clause (A). This is made explicit in clause (B), which allows inclusion of lines for transmitting supplementary, back-up, maintenance or interruptible power to the “QF, including its thermal host meeting the criteria set forth in Union Carbide Corporation….” The difference in the language of clause (A), that references “end-users,” from that of clause (B), which does not, suggests that notwithstanding use of the word “including” in (B), FERC intended category (B) to be narrower than (A). For the microgrid’s wires to be included as part of the QF within the wording of the regulation, their uses would need to be limited to the circumstances described in one, two or all three criteria, the last being (C), which provides for transmission amongst various QFs for either purpose.[54] The language of (B) is somewhat troubling, however, because the holding in Union Carbide specifically expanded the right to receive supplementary, back-up, maintenance, or interruptible power to an entity that was not consuming thermal energy, although it was found to be integral to the cogeneration plant. The thermal host was already covered by Alcon. So, to some degree, the regulation appears to be narrower that the case law it references because it does not provide a means to include within the QF the transmission lines and other equipment necessary to deliver supplementary, maintenance, back-up and interruptible power to a microgrid customer that is not also a thermal host.

Notwithstanding FERC’s narrow provision for the ownership of transmission equipment by a QF, the entire microgrid could qualify as a QF, if all the connected load and generation functions as an integral whole. But, as discussed, the strongest case for a microgrid’s QF status could be made if the QF’s electric-energy consumers are also thermal-energy consumers.

One additional point regarding the microgrid’s circuits: FERC’s regulations do not explicitly reference distribution lines, although functionally, such lines could also serve the referenced purposes of moving power from the QF to its retail loads and “transmit[ting] supplementary, standby, maintenance and backup power to the qualifying facility” and its thermal host.[55] While omission of a reference to distribution lines could be understood to exclude them from the definition of “QF,” FERC explicitly included retail applications when it revised its regulations to expand the definition of a QF. Specifically, after clarifying that PURPA does not bar retail sales, the Commission stated that its “modified definition of a qualifying facility will, accordingly, recognize that QFs may use transmission lines and interconnected facilities to exchange electric power without regard to the nature of the purchaser of the QF’s power.”[56]

The omission of a specific reference to distribution lines may have been something of a historical accident. When the question of whether transmission lines, transformers, and switchyards were part of the QF first arose, FERC’s regulations exempted QFs from regulation under the Federal Power Act (“FPA”) on a broader basis than it does currently.[57] The regulations also exempted QFs from regulation under the Public Utility Holding Company Act of 1935 (“PUHCA 1935”), which was much more burdensome than today’s regulation under the PUHCA, as revised in 2005.[58] In 1987, when Clarion Power Co., a waste-coal fired small power production facility, sought to include a transmission line as part of the certified QF, the company raised concern that ownership of the line, which was needed to reach the interconnecting utility’s nearest substation, “would render Clarion a ‘public utility’ under section 201 of the [FPA] [citing 16 U.S.C. § 824(e)(1982)]and thereby subject to regulation if the transmission line is not deemed to be a part of the qualifying facility, and therefore exempt from the FPA and [PUHCA] of 1935 [citing 15 U.S.C. § 79, et seq. (1986).]”[59] In short, Clarion’s question was framed in reference to a transmission line.

Further, a distribution line would not have raised the same concern. Ownership of a distribution line would not have brought the QF owner within FERC’s jurisdiction under the FPA, because FPA jurisdiction only extends to transmission and sales at wholesale in interstate commerce.[60] Ownership of distribution facilities used to make sales of electric energy could have brought a holding company that owned the company that owned the distribution lines within the scope of PUHCA 1935, but not if the sales were to “tenants or employees of the company for their own use and not for resale” and, of course, consumption by the owner itself would not have been deemed a sale.[61] In addition, there were several exceptions to PUHCA both within the definition of an “electric utility company” and in the substantive provisions, including for holding companies that were solely intrastate in nature.[62] Thus, distribution lines would have been of little or no importance compared to a transmission line when crafting the criterion by which to define a QF. Because Congress repealed PUHCA 1935 in 2005 and replaced it with a much less invasive statute, regulation under PUHCA is no longer the obstacle it once was.

Had the question of distribution lines been raised, FERC should have reached the same conclusion as it did with respect to transmission lines, transformers, and switchyards. Both distribution equipment and transmission equipment provide the same essential functions of delivering QF power to the offtaker and delivering supplementary, standby, maintenance, and back-up power from the macrogrid to the QF and its offtaker(s), albeit at different voltage levels. While the voltage level necessarily varies depending on the nature of the offtaker’s application of the power, with distributed generation more closely associated with retail sales, FERC explicitly said that both retail and wholesale applications are included.[63] Thus, it is difficult to see how the inclusion of distribution lines owned by the microgrid owner would disqualify the system from QF certification. This is a point, however, that would merit clarification in any application to FERC for affirmation of QF status.

Organizational Structure

A word about organizational structure is warranted, because it is pertinent to certification as a QF. Unified ownership of the microgrid (the wires and appurtenant equipment) and the connected generation would likely be the most acceptable means to organize the microgrid. FERC regulations are structured to certify a “facility.” In this case, that includes the equipment that produces the electrical and thermal output, the wires, pipes and other infrastructure that connect the generators to load and the appurtenant facilities and equipment.[64]

Ownership may be vested in a single owner, a partnership (limited or general), corporation (including a limited liability corporation) or other such entity. For example, in Union Carbide, the entity that owned the QF was a joint venture between its two hosts.[65] Many ownership forms are possible, so long as the ownership over the entire microgrid (other than the consuming entities) is one entity. If instead pieces of the microgrid are vested in different owners, it would be more difficult to claim QF status for the entirety. Further, FERC has been clear that it “has never determined that a partnership of QFs is itself a QF.”[66]

The recommendation to have unified ownership over the QF would not preclude the potential for financing the microgrid through mechanisms such a sale/leaseback, in which ownership vests in a financing entity, since FERC has been willing to look past such formalities in the past.[67] However, vesting different parts of the microgrid QF (e.g., the cogeneration facility, the wires, a switchyard, a solar array) in different entities, even if just for financing purposes, would erode the argument that the microgrid QF is an integrated whole.

Can A Microgrid Be A QF?

When attempting to apply the statutory provisions, regulations, and case law above to potential microgrid structures, it becomes quickly apparent that not all microgrids can or will be QFs. First, does the generation qualify? Inclusion of a diesel or gas-fired generator (that is not a co-generator) is facially non-compliant. Even if all the generation components are either fueled with renewable or waste power and/or are cogeneration or CHP facilities, they each must meet the criteria to be “qualifying facilities” – e.g., wind or solar projects cannot exceed 80 MWs, waste-fired facilities cannot exceed 30 MWs, and CHP facilities must meet minimum operating and, if gas-fired, efficiency standards.[68]

Industrial or other campus-style installations that have a qualifying cogeneration facility on-site and distribute the electricity and thermal output over their internal, privately-owned distribution system for their own use would meet the definition. Such facilities have existed for years.

The new challenge is whether multi-user microgrids can qualify as QFs. To create a multi-user microgrid that also qualifies as a QF, the wires and appurtenant equipment must also be included. Also, to ensure that all the connected load is entitled to supplementary, back-up, maintenance, and interruptible power, and the interconnecting wires are included under the language of the existing regulations in its narrowest reading, each interconnected load would also need to be a thermal host. So, inclusion of a qualifying cogeneration facility in the microgrid and service to all the participants, for example through a district heating system, would be a very promising model. As noted above, circuits must also be used exclusively for the purpose of delivering QF power and supplementary, maintenance, back-up or interruptible power; and if any offtakers use only the electrical output, it would be necessary under the Union Carbide test for the participants to have another relationship that distinguishes them from the general public. Plausible configurations might include a homeowner’s association, participants in a community aggregation program, a shopping center, or an industrial park, although FERC has not so ruled. Importantly, as in Union Carbide, interconnection with the macrogrid at a single point could be indicative that the load and generation behind the interconnection point function as an integral whole.

The use of an organizational structure in which all the producing participants have an equity interest is particularly appealing. As discussed above, there may be some uncertainty around elements such as whether the retail electric consumers of a qualifying small power production facility are accorded the same Alcon rights as the consumers of a qualifying cogeneration facility’s electrical and thermal output. But if the ownership of all the generation, transmission, and distribution equipment is unified, all the interconnected electrical consumers also share in the thermal output of the cogeneration component, and other relationships amongst the parties exist, such as a tenant-landlord relationship, then all the offtakers are more likely to be able to successfully retain all of their Alcon-granted rights, notwithstanding their consumption of power from elements of the QF that constitute small power production facilities.

The unified ownership structure described above requires the participants to accept limitations, which the participants may find burdensome. The concept of an integrated operation implies a long-term commitment. Although the structure could provide for multiple property owners to work together (i.e., with joint ownership of the QF and separate ownership of their individual properties), the ability of an individual property owner to make future changes to its electrical supply, such as exercising a right to competitive retail access, is necessarily constrained. (The election to join a microgrid could be deemed to be a competitive choice, but even so, future changes would be constrained). Further, even if the current property owner is willing to forego the right to freely change retail electric suppliers, a future owner will be constrained by the need to either step into the shoes of the prior owner with respect to the QF, or disengage itself from the QF, which may require physical changes to the infrastructure.

The question of whether QF status would be beneficial is more difficult. QF status is determined by FERC under federal law. Only FERC has jurisdiction to grant or revoke QF status. While FERC was obligated by statute to prescribe the rules for implementation of PURPA, states and nonregulated utilities had the obligation to implement those rules (and determine the avoided cost rates).[69] States vary in how they did so. Thus, any microgrid seeking to benefit from QF status would need to explore the nuances of how PURPA would or would not benefit it under the law of the state (or territory) in which it would operate.

Moving Forward

There is still much we do not know about how the addition of microgrids will change the electric system, including if the costs of the technology will be reduced with more widespread adoption. It is also uncertain whether microgrids will produce sufficient benefits for their owners and users to justify any increased costs associated with microgrid service, as compared to service from the macrogrid. More experience is needed.

However, given the great potential of microgrids, at this nascent stage when their full capabilities and value are just beginning to be shown, public policy should –at least–facilitate the adoption of microgrids in cases where the participants voluntarily opt to pay the expenses, provided they cause no harm to others. For example, if a group of companies anticipates receiving sufficient benefits that they voluntarily agree to support the additional cost of installing a microgrid, then the regulators’ concerns should be limited to assuring that the microgrid does not negatively impact others, financially (e.g., by failing to pay fair compensation for the grid services it uses), operationally, or by creating unsafe conditions. Increased experience can help determine whether, going forward, the benefits of microgrids merit broad-based consumer support. In order to foster an environment in which the first generation of multi-participant microgrids can flourish and the benefits and costs of microgrids can be fully evaluated, regulators must open markets and pathways to facilitate investment.

PURPA’s history provides valuable insights. PURPA facilitated the growth of QFs and–perhaps to an unanticipated degree–was phenomenally successful at demonstrating the operational viability of competitive wholesale generation. Removing regulatory obstacles unleashed the ability for existing energy-efficient, behind-the-fence generation at industrial sites to participate in the wholesale market and also spurred growth in project financing models that infused the market with private capital.

Unfortunately, PURPA’s positive contributions are only part of its history. In some parts of the country, the avoided cost feature, which was key to jump-starting the market, was implemented in such a way that it spurred inefficient investments and left some utilities with uneconomic burdens. The problem was compounded by a lack of sophistication in the early power purchase contracts that sometimes resulted in unintended consequences a decade or more after execution. PURPA’s mixed legacy is fertile ground for thought.

Drawing from the positive experiences, and learning from the negative, a reasonable first step is to facilitate microgrid installations by removing regulatory barriers. An initial step would be to define a microgrid, and then specify its rights and its obligations.

A broad definition that focuses on functional characteristics (rather than size or technology), would provide needed flexibility for the market to determine efficient structures for ownership, configuration, and financing. If a state regulatory body wants to grant special benefits to microgrids that have specific characteristics, for example, microgrids that consist of renewable resources, or serve specific populations such as low-income residents or industrial parks, or promote other policy goals, that objective can better be accomplished by creating sub-categories (or reforming markets to value such attributes), rather than limiting all microgrids to a specific mold.

The definition should take into account that part of the value of a microgrid lies in its ability to coordinate the “wires” functions of the microgrid with the connected generation, as well as the load. Restrictions that limit the ability of the owner of the microgrid’s wires or its affiliates to own generation may unnecessarily limit growth of microgrids by barring the wires owner from securing the more seamless operation that might be had from unified ownership of the wires and the generation. Regardless of whether a microgrid’s elements (its generation, circuits and other equipment, and its interconnected load) are owned by one or more persons, and whether that person is an incumbent utility or a non-utility service provider, regulations must allow the microgrid to operate as an integrated whole to the extent possible to ensure all benefits are realized.

Early adopters are more likely to be large users who are sophisticated purchasers of energy services, primarily because of the cost involved. These microgrid customers should be able to adequately protect themselves and define their respective rights and obligations by contract. The regulator might establish some parameters to ensure this is the case. For example, the regulator might require any microgrid that proposes to serve unaffiliated customers to submit information about its microgrid to the applicable state public service commission for review, subject to exclusions or safe harbors if the unaffiliated customers meet defined criteria.

As long as the capital support for such a microgrid would come from private investment and not the utility’s other ratepayers, it is also appropriate to exempt the microgrid owner from utility-like regulation of its rates, finances, and organization in a manner similar to exemptions granted to QFs under PURPA. To protect unaffiliated customers, the regulations applied to competitive retail load-serving entities (“LSEs”) could be evaluated as a potential model, as LSEs provide services most comparable to those a microgrid would provide.

Following the lead of PURPA, regulators should remove any barriers to microgrid interconnection. This includes removing the barrier of uncertainty by specifying the rules that apply to interconnection. Reasonable rules regarding siting, safety, and operation, which are generally state-based or found in national standards, are appropriate to ensure the safety of the interconnected system and the public. Further, again following the PURPA blueprint, state regulators should ensure that the multiple participants in the microgrid, inclusive of all interconnected load and generation, have the right to receive supplementary, maintenance, back-up, and interruptible power on a non-discriminatory basis.

It is appropriate to require microgrid owners to pay for interconnection, transmission, and distribution, all other grid services, and commodities required to provide continuous retail service (supplementary, maintenance, back-up, and interruptible power), but those charges must be assessed in a non-discriminatory manner. In addition, microgrids should be fairly and non-discriminatorily compensated for the services they provide to the grid, which may include frequency regulation, voltage support, demand response, and black start capability, as well as energy and perhaps capacity. Rather than instituting a mandatory PURPA-like purchase obligation, regulators should remove any barriers that prevent the microgrid from bidding its services into the market, just as any generator would. To the extent that the microgrid must subrogate some or all of its obligations to the grid to the demands of its connected load, that qualitative characteristic can and should be reflected in the compensation received from the market, not bar it from the market.

One of the most difficult issues is understanding and differentiating the role of a microgrid as compared to a distribution utility. Microgrids are often viewed as competitors to distribution utilities, but should be more accurately seen as a new type of customer for the utility. Although a microgrid has somewhat different load characteristics than the average customer of a similar size and behind-the-meter generation, it also needs utility services. By having the ability to integrate generation and load on a small scale, a microgrid can offer its interconnected load and the interconnected distribution utility flexibility. The microgrid can also be as source for demand response and improved grid resiliency. Rather than greeting microgrids with hostility, regulators and other market participants should recognize microgrids as a new option for consumers, a valuable opportunity for improved grid operations, and a potential source of value for all market participants who might transact directly with them or benefit indirectly from the reliability and resiliency value they can bring to the grid.

In at least one competitive retail access state, regulators raised the concern that microgrids conflict with customer choice, because when a microgrid is operating in island mode, the interconnected customers would have no option except to be served by the microgrid.[70] The election of a property owner to contract for microgrid services, however, is a choice, even if binding for a long-term period. The participant can establish the terms and conditions for its service, and conditions for exiting the microgrid or for transferring its rights upon sale of its property, including any gains or losses associated with that decision. That flexibility is not a restriction on choice, but rather provides a new option, and should be recognized as such by law.

Full integration of microgrids will also require a deeper dive into the economics and structure of the electric utility industry. For example, a microgrid might provide value in the form of deferred investments in transmission or distribution upgrades, and thereby provide savings and value to the interconnected utility and its ratepayers, as compared to the utility-built option. But in doing so, the microgrid would displace investments that would otherwise be made by the distribution utility or perhaps require different types of investments to facilitate its integration. For microgrids to move from isolated pilots to full integration, regulators should examine both planning practices and utility compensation mechanisms. Most states still rely on utility-centric planning and compensation practices that are biased in favor of ratebase investments. These approaches can penalize a utility for accepting the services of a private microgrid in lieu of building the infrastructure needed for it to provide those same services. To help expand the services available to customers, regulators should implement: (1) transparent planning processes that allow third parties access to the information and analytical models the utilities use, (2) an opportunity for third parties to offer alternatives to traditional utility investments, and (3) compensation systems that reward or penalize utilities based on outcomes and performance, not on how much they invest in capital.

Conclusion

Microgrids have the potential to benefit consumers, reduce energy consumption (and, therefore, emissions) by increasing efficient use of the grid, and provide services to the grid competitively. Doing so requires legal certainty. A narrow subset of microgrids may be able to secure some certainty and legal assistance by configuring themselves to fit the definition of a QF. Ultimately, however, to more effectively integrate a wider variety of microgrids, laws and regulations must be adjusted to explicitly address their needs.

PURPA’s framework offers some fruitful ideas for facilitating this addition of microgrids. A fuller implementation also requires systemic changes to industry practices such as planning and utility compensation. These types of changes would enable microgrids, working in conjunction with existing distribution utilities, to enhance consumer options and would help unleash the full potential of this technology.

The next steps involve action at both the federal and state levels. States should evaluate the scope of regulation over microgrids that is needed or desired, and remove regulatory barriers that are not required to protect the public interest. FERC can help resolve many of the outstanding issues regarding whether a microgrid can be a QF, and the conditions that allow it to be one. Perhaps even more importantly (since PURPA will at best apply to only a narrow set of microgrids), FERC can open an inquiry into the role that microgrids can play in reliability and resiliency, and remove barriers to their participation in wholesale markets. Each of these steps would accelerate the deployment of microgrids, and the value that they can bring to the grid. The most critical requirement is that states and FERC work collaboratively to clarify the boundaries of their respective jurisdictions over this emerging technology and work cooperatively to facilitate microgrid implementation.

*Donna M. Attanasio is the Senior Advisor for Energy Law Programs at The George Washington University Law School, where she administers the law school’s Sustainable Energy Initiative. She has over thirty years of experience in the electric utility industry, including significant experience related to the implementation and administration of PURPA while in private practice. Her current work focuses on transitioning the U.S. electric system to a sustainable future. The author thanks her research assistant, Daniel Vinnik, and peer reviewers, Carl Pechman and David Dulick, for their valuable contributions and insights. The author is solely responsible for the content of this article. The views expressed herein do not necessarily reflect the views of The George Washington University Law School, the contributors to this article, the George Washington Law School’s Energy Law Advisory Board, or any other person.

[3] “Load” refers to the usage of the consumers of the energy produced by the microgrid. These consumers are also often called “offtakers,” which as used in this Article generically refers to all users of the products, regardless of whether they pay for the product or not (for example, it might include the microgrid’s owner). This Article refers to offtakers who pay for the product as “customers” of the microgrid.

[4] Macrogrid, as used in this article, refers to the existing legacy electric system, including distribution and transmission functions.

[5] There are many alternative definitions of the term “microgrid.” The U.S. Department of Energy utilizes a definition developed by the Microgrid Exchange, which is: ‘‘a group of interconnected loads and distributed energy resources within clearly defined electrical boundaries that acts as a single controllable entity with respect to the grid. A microgrid can connect and disconnect from the grid to enable it to operate in both grid-connected or island-mode.’’ Dan T. Ton and Merrill A. Smith, The U.S. Department of Energy’s Microgrid Initiative, 25 The Electricity J. 8, 84 (2012).

[7] 16 U.S.C. § 824a-3(a)(2) (2012) (Rules prescribed by FERC to implement PURPA “may not authorize a qualifying cogeneration facility or qualifying small power production facility to make any sale for purposes other than resale”). PURPA does not prevent a QF from making retail sales if state law permits it.

[8] 18 C.F.R. § 292.602(b) (2012). Presently, this exemption relieves a QF of obligations under the Public Utility Holding Company Act of 2005, which consists primarily of record keeping and reporting requirements. However, from the time PURPA was enacted until 2005, the much more onerous Public Utility Holding Company Act of 1935(“1935 Act”) was in effect. The 1935 Act, Section 11 (formerly codified at 15 U.S.C. §79k) included a “simplification” requirement that limited entities owning public utilities (defined to include generators used to sell power to others) from owning other businesses. With the QF exemption from the 1935 Act, industrial companies, such as those engaged in the paper and pulp, automobile, chemical, oil refining, steel making, and many other industries were able to sell the excess power from their on-site co-generation facilities to others without running afoul of the simplification requirement.

[18] Due to limitations on the construction of transmission lines, the owner would likely face additional regulatory burdens or potentially face franchise law violations if it sought to extend its lines across public streets or property that was not owned by it or the end-user.

[19] The applicable PURPA rights and obligations will vary depending on the size, fuel, and configuration of the microgrid QF.

[21]See Alcon (Puerto Rico), 38 F.E.R.C. ¶ 61,301 at 61,975 (1987). Note that the QF may sell power at wholesale or retail. However, it is impossible to conceive of a case in which the purchaser of the power at wholesale would be entitled to, or need, supplementary, back-up, maintenance or interruptible power,all of which are retail products, since, by nature of the sale, the wholesale purchaser is not the “consuming portion” of the QF.

[22] “Cogeneration facilities” are also known as “combined heat power” or “CHP” facilities.

[25] The statute requires the thermal output to be used “for industrial, commercial, heating, or cooling purposes.” 16 U.S.C. § 796(18)(A)(ii). In promulgating the rules, FERC clarified that heating and cooling applications of the thermal energy could be residential as well as commercial or industrial. Small Power Production and Cogeneration Facilities – Qualifying Status, 45 Fed. Reg. 17959, 17959-60 (Mar. 20, 1980).

[27] In order to determine if a small power production facilities has met the size limitation, FERC looks at the combined capacity of all the small power production facilities within a one-mile radius that are owned by the same person and that use the same fuel source, or, in the case of hydroelectric facilities, that use water from the same impoundment. Id. § 292.204(a).

[43]Id. at 61,120 (“We do not believe that third-party ownership arrangements should per se preclude qualifying cogeneration projects from receiving back-up power.”). Whether the consumer of the QF power is entitled to non-discriminatory rates for back-up power was resolved in 1988. In Alcon (Puerto Rico), Inc., 38 F.E.R.C. ¶ 61,301 (1987), FERC rejected a challenge of the Puerto Rico Electric Power Authority (“PREPA”) to the right of Alcon’s pharmaceutical plant, which consumed power generated by a qualifying cogenerator that it did not own, to receive back-up power. Although FERC affirmed Alcon’s right to receive service, it muddied the water by declaring that Alcon was not itself a QF, but that “the right to back-up power…covers both the production and consumption functions, irrespective of whether they have the same ownership.” Id. at 61,975, aff’d by Puerto Rico Elec. Power Auth. v. FERC, 848 F.2d 243 (D.C. Cir. 1988). See Puerto Rico Elec. Power Auth., 848 F.2d at 246 (stating that FERC’s clarification that it “did not find that Alcon’s pharmaceutical plant was a QF or that Alcon would own or operate a QF” did not undercut FERC’s determination that Alcon was “the consuming component of a unified qualifying cogeneration project”). The Court of Appeals for the District of Columbia also rejected arguments that the non-discrimination requirement of PURPA applied only to the producing portion of the QF: “This argument falls with our disposition of PREPA’s claim that the Commission never found Alcon to be the owner of a QF. Having found Alcon’s pharmaceutical plant to be a component part of a qualifying facility, it necessarily found Alcon to be the owner (albeit not the sole owner) of a qualifying facility. Hence, Alcon is a “qualifying cogenerator” and PREPA may not discriminate against it in selling back-up power.” Id. at 249.

[54] FERC could find other factual situations to be compliant on a case-by-case basis, for example, if the factual pattern had not been previously raised or the Commission sets forth a rational basis for changing course from prior determinations that are otherwise factually similar.